Percentage test does not work for assessing TUPE transfers

Earlier this year an appeal1 to the Employment Appeal Tribunal by the well known logistics company Eddie Stobart Limited (ES) challenged the meaning of an ‘organised grouping of employees’ under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), with a rather surprising result. This result has subsequently been followed in another logistics case2, this time involving Ceva Freight (UK) Ltd .

Facts of the case

Eddie Stobart Ltd (ES), a logistics company, closed its operational site at Manton Wood in Nottinghamshire in 2009. At the time of the site closure two contracts were being serviced from the site. One contract was for the supply of meat to ASDA. The other contract was known as the ‘Vion’ contract.

The ordering pattern of ASDA meant that its stock was picked overnight by those employees working the nightshift, whilst stock for the Vion contract was picked during the day. This meant that the staff who worked the dayshift spent the vast majority of their time working on the Vion contract.

When the site closed ES argued that the dayshift employees who mainly worked on the Vion contract would, by the virtue of TUPE, transfer to FJG Logistics Limited (FJG), who were taking over the contract. FJG argued this was not the case.

TUPE provisions

TUPE provides that where there is a ‘service provision change’ (in this case the Vion contract being transferred from ES to FJG) the affected employees may transfer from the old contractor (ES) to the new contractor (FJG). In order for this transfer to take place certain conditions must be met. These conditions are set out in Regulation 3 of TUPE.

This case turned on Regulation 3 (3)(a)(i) of TUPE which states that employees will transfer where:

“Immediately before the service provisions change; there is an ‘organised grouping of employees’ situated in Great Britain which has as its principal purpose the carrying out of the activities concerned on behalf of the client.”

Arguments

FJG argued successfully, at a pre trial review, that just because the employees who worked the dayshift happened to spend most of their time working on the Vion contract, it did not mean that they were an ‘organised grouping of employees’ to satisfy the TUPE provisions. Therefore, the employees who worked for ES on the Vion contract would not transfer to FJG.

ES appealed to the Employment Appeal Tribunal, arguing that it was enough to show that the employees had worked mainly on the Vion contract, for them to transfer to FJG. The appeal was unsuccessful. The tribunal found that ES had failed to establish that there was an ‘organised grouping of employees’ and therefore the employees would not transfer with the service provision change.

The tribunal held that the fact that circumstances dictated that certain employees would spend most of their time working on the Vion contract did not give rise to an ‘organised grouping’. There was no particular planning or intent on ES’ part to structure the employees to serve a particular client. The organisation of the work at Manton Wood was not by reference to clients but on a shift system. The tribunal placed importance on the fact that the vast majority of the employees concerned were unable to identify themselves as working for a particular client. They were simply dayshift workers, albeit that the vast majority of FJG’s work had to be done at the time they were engaged to work.

The Ceva case

The subsequent Ceva case picked up the same theme and cited the Stobart case to emphasise the importance of workforce organisation by the employer, rather than the amount of time worked by employees for specific clients, in determining whether there would be a TUPE transfer.

In this case an employee of Ceva, Mr Moffat, worked in a team of eight dedicated to outbound goods and spent 100% of his time working on an account for one client, Seawell. The other seven employees in the team spent 0-30% of their time working on the Seawell account. Seawell subsequently took the work back in-house and Ceva argued that Mr Moffat’s employment had transferred to Seawell.

The tribunal disagreed with Ceva and held that the team of eight was an organised grouping dedicated to outbound activities but was not organised for the principal purpose of carrying out Seawell work.

The tribunal found that although a single individual can form an organised grouping, there was no evidence to suggest that Ceva had specifically formed a group consisting of Mr Moffat to carry out the Seawell work. It just so happened that Mr Moffat spent 100% of his time working on that account.

The end of the percentage test

In each case, the Employment Appeal Tribunal concluded that an ‘organised grouping’ connotes that employees should be organised in some sense by reference to the requirements of the client in question. Regulation 3 (3)(a)(i) does not extend to cover a situation where, due to circumstance, a group of employees might in practice, but without any deliberate planning or intent, be found to be working mostly for a particular client.

These cases reinforce previous guidance given by the Department for Business, Innovation and Skills (BIS) which observes that the ‘organised grouping’ condition is meant to confine TUPE to situations where the outgoing service provider has in place a team of employees that are ‘essentially dedicated’ to carrying out the activities that are to transfer.

These decisions show that for employees to transfer between contractors on a service provision change under TUPE, something more than the fact that an employee spends most of their time working for a specific client, must be shown. For example, a specific decision to organise employees to work for a specific client.

Practical implications

This is a surprising decision. It had previously been considered by many that the ‘organised grouping’ condition meant that if an outgoing service provider had in place a team of employees who essentially spent the vast majority of their time carrying out the activities that were to transfer, this would be sufficient. However, this case, and the subsequent decision in the Ceva case, clearly demonstrates that a simple percentage test to consider whether someone spends the majority of their time working on one contract is not sufficient. Something more is needed.

The decisions imply that the employees must know that they are working on a contract for a specific client. This may have the effect of removing TUPE protection for a lot of employees in the outsourcing industries, where it can be rare to have identified, client-dedicated teams.

The practical consequences of these decisions are that contractors will have to arrange their staffing structure to ensure that employees are assigned to specific clients rather than serving their customers generally, if they wish them to transfer under TUPE upon termination of the contract.

This case also has a knock on effect for the companies who are engaging contractors. They will face an unpredictable situation and will want to know how their contractors are organising their workforce to ensure that they are clear whether there will be a TUPE transfer if they decide to take the contract back in-house or appoint a replacement contractor.

Concluding thoughts

These judgments seem to go against the principle of TUPE: the protection of employee rights. Many commentators feel that these decisions are likely to increase the number of occasions where employees will not transfer when they would expect to do so, leading to redundancies as a result.

These decisions may also lead to an increase in companies looking to move their outsourcing offshore. If, by having to arrange their employees into specific client teams, UK contractors are less efficient or cost effective, companies may look to offshore contractors who do not have to comply with TUPE regulations.